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    US services plays catch-up with contracting manufacturing

    It has been a turbulet year so far thanks to soft data from US and China, geopolitical tensions and a continued oil rout, and the ISM services pmi read overnight just added to the concerns for global growthin 2016. 

    View related posts:
    US manufacturing contracts fastest since July 2009
    China services PMI sees slowest increase in 17 months

    A cursory glance will show you that the majority of the data is still expanding (shaded in blue) with only three sections now within contraction. However if we rewind a few months we were presented with a similar outlook for the manufacturing sector. As mentioned above the manufacturing sector is now contracting at it fastest pace since 2009, the headline read is below 50 and one by one we have seen the shades of blue turn red.

    The question I was pondering going into 2016 was if manufacturing would turn around and converge with the service sector (which accounts for a much larger part of the US economy), or if services would slow its expansion and start to contract. If we see both manufacturing and services in contraction mode then there is a compelling reason to see US stocks sell off as they anticipate the business cycle has peak. So whilst services is still expanding, it did miss expectations and will be a number I will be keeping a very close eye on over the coming months. 

    As before with manufacturing, the components to keep a very close eye on are new orders, employment and business production, as these are considered leading indicators to the PMI read (which itself is considered to be a leading indicator). 

    The chart above compared the manufacturing and services read since 2008 along with the differential. Interesting to note that manufacturing does tend to lead services, so with the differential clearly within negative territory then it does suggest we could see a top in services over the coming months. Then it will become very interest to see how the FED get on with their rate hike program, or revert to lower rates along with every other central bank who has tried (and failed) to lift off from zero. 

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